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Monthly Archives: October 2012

If Hollywood were to draft a blockbusting script with the Iranian nuclear threat as its theme I could imagine two protagonists at its core racing to prevent catastrophe. The American [possibly female] played by one of the new wave of British actors so popular now, would be a lowly intelligence officer, an analyst in something dull like the countries imports, on the opposite side of the world an Iranian [played by a darker skinned British actor] who would also be a middle-ranking civil servant. We will make him a geologist. The back story of each of the protagonists would keep this epic subject human, the American would have most likely had a promising start to their career but had fallen because of a screw up, which was no-doubt, their superiors fault, they also suffer some human but crippling fault like addiction or mental illness. The Iranian is a caring family man, sensitive, genuine but at odds with the religious fundamentalism of his government.

The rest of the story is fairly predictable: intelligence suggests the Iranians are moments away from assembling a nuclear warhead, with Iran and Mahmoud Ahmadinejad [shown in a compilation of news clips] threatening the very existence of Israel. Meanwhile Israel is threatening to bomb the bomb making factory deep in a mountain, but this doesn’t suit American foreign policy as it would jeopardise peace in the Middle-East. Doing nothing and allowing Iran the bomb would mean almost certain holy war of Shiite’s belief in the return of the 12th Iman and a great Islamic Empire which, in turn would force their long term adversary: the Sunni Saudi Arabia, into a devastating global conflict dragging the West into the battle as they desperately try to secure oil supplies. Allowing Israel to attack the nuclear installations would trigger another kind of war and just to give the movie plot an extra twist, a late revelation reveals the bunker busting bombs chosen would be useless against the bomb making reactor deep in the mountain.

As the film reaches its climax and the dilemma between action and inaction is forced into an explosive conclusion it is our protagonists who find the answer. Perhaps the geologist is able to convince his authorities that the reactor [just about to be turned on to make its deadly nuclear bomb material] is on a geological fault line that was just about to slip and cause a local nuclear disaster and must be decommissioned. Or perhaps the plucky Analyst has to convince their superiors that the intelligence is flawed: Iran is years away from assembling a bomb and the US has been deliberately fed misinformation by double agents bent on achieving war with Israel and the West and the re-establishment of the Mullahs who are losing power as the Arab spring empowers the disgruntled Iranian people desperate for democracy. At the last moment the reactor is decommissioned, the planes return home and peace is secured for a few more years. The last few frames are the beginnings of an uprising as the oppressed Iranian people take to the streets.

However, as glossy blockbusters go it is perhaps a little too predictable, it could be worse, it could end with a team of Navy Seals or SAS abseiling into the underground nuclear installation blowing up the tunnel and sealing the radioactive debris in a mountainous tomb with the blame for the attack placed on the shoulders of an obscure-homegrown-super-fundamental Iranian sect at odds with, what it considers, the liberal mullah rulers. So lets rewind to the beginning and have a gritty plot which is big on dialogue and has a real twist.

The truth is that a daring bombing raid that cripples the nuclear infrastructure of Iran would have to be comprehensive and it would need to be several attacks on installations all over Iran. If it could be achieved it would need the airforce of the US, multiple bombing runs, the biggest ground penetrating bunker buster and would be pretty close to an all out attack. It would most likely empower the current Iranian government who are currently struggling with sanctions and hyper inflation and who could entrench their position claiming that the West is the threat they claim. And ultimately they would double their efforts to obtain nuclear weapons, perhaps buying them from Pakistan or North Korea to prevent future attacks, an attack now would just delay nuclear proliferation. But wait, in Hollywood land couldn’t we have a daring bombing raid where a lone stealth bomber drops a super ‘earthquake bomb’ to cause the underground mountain bunker to bury the threat forever and appear to be a natural disaster? The movie closes with the President in a newscast commiserating with the Iranian government and promising to send aid to the earthquake victims with the hope it may heal Iran-American relations….Perhaps not.

In reality an Israeli or American attack could drag Britain into the conflict, the future of our gas supplies are tied up in Qatar just a few miles across the Gulf from Iran and an easy retaliatory target for the Revolutionary Iranian Guard. The UK has an RAF combat base there.

But perhaps there is a bigger threat, a bigger twist in this plot. Perhaps the Iranian government is telling the truth about its nuclear program and it is purely peaceful and hiding in plain sight is a far more scarier truth. Perhaps Iran’s sabre rattling and claims of a peaceful nuclear development which is tinged with hostility to the International Atomic Energy Agency monitoring nuclear proliferation is a double bluff. Saddam Hussein did much the same thing, claiming there were no WMD yet making it impossible to verify just to give the impression that they really had WMD despite it being an empty threat.because he thought Iran was a greater threat than the US.

The biggest twist is that Iran: the second biggest oil producer is actually running out of oil.

A look at historic Iranian oil production [Iranian Oil Production 2000-2012 link] could show that either the Iranian government is dreadfully inefficient and unable to keep the nationalised oil industry up to date or that production peaked in the mid 00s [noughties] and is quickly dropping off from 4 million barrels a day in 2008 to 3.5 m/bbl today. This kind of reduction is beyond anything manageable on a national and ultimately international level [The Hirch Report [link] reckoned on a 3% annual reduction worldwide would bring chaos].

It is assumed that decreasing Iranian oil production is due to sanctions but these only came into force in the summer of 2012 which is not included in the graph. China and even Japan have leapt on the opportunity to buy Iranian oil with their own currency so Iran is unlikely to have lost customers. Iran, along with the rest of OPEC, has had ever growing reserves, in 1987 reserves increased from 49 to 93 billion barrels and currently the reserves stand at 151 billion barrels [ despite over a billion barrels a year being extracted for the last couple of decades]. OPEC countries do not allow independent assessment of reserves and the advantage of lying allows for member countries to extract a bigger quota, maintain social and economic stability as well as encourage investors to imagine that the country is a safe bet. If Iran suddenly announced that reserves were low, domestic fuel would be rationed to ensure exports, attention would turn to other OPEC reserves, the people would probably riot and overthrow the mullahs and a global economic crisis would ensue. The truth could be far worse than a few nukes in the hands of Iran.

There are plenty of signs that Iran has energy difficulties: the ludicrously cheap and subsidised petrol and energy prices of a few pence per litre are being tackled by government but there is also huge investment in making vehicles run on natural gas. The official view is that Iran has little refining capability and has to import petrol and that it is vulnerable to foreign sanctions or international issues. One may ask why they don’t build capacity considering that it is cheaper than nuclear power stations. Indeed nuclear power would be a sensible option for a country with good uranium reserves, and a population whose power consumption is closer to high users like the U.S.

The Iranian government has a track record of mismanagement but whilst the prospect of Peak Oil still means that the country may well be extracting oil for another 50 years [rather than the projected 100 years] it still has to keep the illusion that everything is fine. They need to make a transition that means their domestic energy needs are met with a mix of supply [that even includes windturbines] and they are able export oil to pay for it, yet continue the pretence and the denial of developing nuclear weapons becomes the double..er..double, double bluff.

The protagonists of our movie are forced to make a decision, to speak or stay quiet. In the real world you could take the proof to major newspapers even Fox News and despite being news worthy there are plenty of people who just don’t want to hear it. The closing scenes of this movie is a right-wing commentator on Fox News proclaiming it to be a eco-nazis plot, a hoax by tree-hugging pinkos and enviro-fascists trying to prevent Americans their right to drive their car.

The future is yet to be written, we could move from our current fossil fuel driven, technology era to a sustainable technological era or suffer climate change and fossil fuel depletion in a very uncertain future. Exactly how bad the future of our lives, that of our children’s and our grandchildren is unknown, the discharge of CO2 through human activity will not in itself cause huge climate disruption, what is at issue is the feedbacks of the climate. Computer modelling, applied physics and observation can only do so much in the testing of climate change theory, they are not crystal balls but tools. And that is very much the theme of this post.

When I first became interested in the environment way back in the 1970s the issue was one of pollution and the loss of species, despite the knowledge that CO2 could change the climate as early as the 1950s it only became an issue in the early 1990s, but what if CO2 was not a problem, where would we be today?

Peak Oil, that is, the point in history when demand starts outstripping supply as well as the discovery of replacement wells is an issue now. [ the Wikipedia entry covers the issue extensively] Predictions for when it will occur range from any time between 1999 and 2040. The United States Government felt compelled to do a study of the consequences in its Hirsch Report in 2005 which concluded that oil would start to decline around 2015. Oil companies such as Shell are dismissive of Peak Oil believing that the industry will carry on supplying well into the future and when unconventional oil is taken account, that is very heavy crude and tar sands which make up over half of known reserves, we have plenty to burn as pointed out in these articles, here and here. Others however mistrust the fossil fuel industry [see here] [and here] with industry experts being at the forefront of the criticism, the author of the US Peak Oil report was a former high ranking employee of Exxon.

When the banks collapsed it took governments by surprise, well at least they pretended ignorance despite warnings from whistle-blowers in banking. Governments were assured by the finance industry that everything was above board and it was yet another way they were creating wealth. In hindsight it is all perfectly clear, the banks created a system the was inherently flawed and easily abused, and one some would consider fraudulent. Why then, should we, our government and anyone effected by the 2007 credit crisis trust any industry? Is being burnt by the banks an exception or would it be wise to be sceptical of the energy industry?

Enron was, back 2000, an energy giant with a turnover of $100 billion and a value of over £60 billion, a year later it was bankrupt as a complex fraud was revealed. Board members and key personnel were unaware of the fraud, the clever book keeping and the amount of liabilities. Unconventional shale gas [aka fracking] may also be an elaborate business model bordering on a Ponzi scheme, or at the very least a gold rush. At the moment the dash for shale gas is big in the US, it is very competitive and the price is now low, at the same time insiders indicate some ‘seams’ are lot less productive than first thought but as drilling rights are highly prized some companies are appearing to be in good profit by selling off their rights to late comers. At the moment it is a gold rush with plenty of investors but if production quickly peaks then there will be more losers than winners and ultimately the gas price will climb. This video covers the issue in more detail. You may ask, why don’t people such as investors do a little research? Clearly on past performance whether it be the 1930s Wall Street crash, 2007 credit crunch, the dot com bubble or the recent sale of Facebook which lost half its value in just 3 months, investors operate in a very optimistic environment.

Sceptics/deniers of Climate Change are quick to mention the wonders of thorium nuclear reactors [which have failed to work commercially for 50 years] and shale gas, they want to believe both technologies will provide cheap abundant energy. The desire, particularly in the US to return to the good old days of cheap fuel is such that a new conspiracy theory is forming that it is only evil [tree huggers] [the government] [bankers] [Arab revolutionaries] (tick box) are keeping the prices high. But before we laugh at their naivety look around, do you see many people getting concerned that the beginning of the end of the oil era may be upon us in 2 years time?

About 3,170 years ago Ramsis III built great temples, many statues, a great tomb and additions to the great temples that superseded that of many of his forebears. His inscriptions and relief carvings show a great Pharaoh ruling over a great land, the truth was very different to the impression. Documents were to eventually turn up that tell of a different story: his most important staff, his tomb workers went on strike because of lack of food, his great battles with invading armies were undecided and his queen organised a military coup against him. Egypt was suffering drought and it was part of a 20 year climate change event that reshaped every civilisation. Ramsis III is considered the last great pharaoh and Egypt quickly fell into decline after his death. He held it together and gave the impression nothing had really changed.

The oil [and gas] industry want to give the impression there is no need to worry, and we want to believe them. We won’t be thrown into some Mad Max world where gangs of bikers scavenge the last of the petrol, but fuel will continue to be more expensive until a point when countries start warring, economically and perhaps violently to get their share of a diminishing resource. Both China and the US need to keep their peoples happy with the consumer dream, for China consumerism has been the treat to keep its people from revolution, the moment it fails to deliver is the moment the people will hit the streets. If a billion new car owners is what it takes I am sure China will do everything in its power to enable that [it plans for just 20 million electric cars by 2020].

So if you are an investor, say, with a few £billion for pensions in 20 years time where will you put your money. Even the oil companies admit that the cheap easy oil will be severely diminished in 22 years. If climate disruption continues to increase in frequency we can expect more years like this year where the US and Europe have lost 20% or more in food production. If governments do decide to act belatedly and cap CO2 emissions and therefore the fossil fuel industry where are you going to put that money, now?

BP’s 2011 profit was $24 billion, with assets of $280 billion, as long as it stops its rigs or refineries blowing up it is a safe investment, but those assets are future oil, oil in the ground which may have to be left there or may be grossly over-estimated. As an investor you don’t know and if times are good now what is going to be the signal that the black gold oil rush is over? As oil companies seek new reserves they are drilling into deeper waters, operating in unstable countries, spending more money looking for smaller and smaller reserves and those healthy dividends will start to look smaller and smaller. You don’t even need peak oil to get nervous: Saudi Arabia is one of the most oppressive societies on earth, it is also secretive, if a country like Tunisia can erupt in revolution so can SA, and there the Wahabi Islamists, who are likely to prevail, are not friendly to the West. A few months, a few weeks without their oil would throw the markets into chaos. [If in the first Gulf War we hadn’t joined in the Kuwaitis would have have sold $billions of assets to raise a mercenary army and cause chaos to the global economy in the process.]

We won’t know when peak oil has occurred until after the event so does it not make sense for investors to plan ahead now? The alternatives to the $6 trillion energy market as well as current transport are clear. It is alternative energy, it is electrification of railways and eventually private transport, it is local business, local shops, and local housing rather than out of town suburbs, shopping malls and long commutes. It is thousands of opportunities to be there first and make a profit in the process. Even Richard Branson and Virgin airlines is investing in a non fossil fuel, non bio fuel alternative ‘for when oil runs out‘.

I doubt many investors will read this blog but to make that change and for humanity to avoid that environmental disaster we need to do something. May be it is -the economy stupid- we are perhaps, wasting our breath on the denial-sphere, on politicians with a five year agenda, instead we need to focus on those with a long term vision, we need to get the market to think straight and really hedge its bets.

Oil: future historians will no doubt look back at our short 150/200 year era as the one of oil. This human era will sit neatly between the Industrial Revolution of coal and steam and a new period that we will ultimately decide. The future is unwritten but there are interested parties not least the oil industry who actively write their version.
I don’t want to join the ranks of conspiracy theorists [albeit mild one] who blame all wars on oil but ‘its all about oil’ is a truism. Sure the Iraq war would have unlikely to have happened had it not been for the first one with the invasion of Kuwait, triggered by a supposed oil dispute, and invasion of North Korea with its WMDs [and no oil] is highly unlikely but the real issue is our economy: it is driven by oil and gas. Our love affair for the motor car is such that newspapers eagerly report almost every discovery of a new oil field, reassurance that our lifestyle is not under threat. Only the dark existential threat of Climate Change hovers over the optimism that the wheels will continue to turn and our futures will remain unchanging.

There are facts that are disturbing: there is around 1,200 billion barrels of oil in known reserves, if they are burnt [along with known gas & coal reserves] it will produce 2,800 gigatons of CO2. The most optimistic view of mitigating climate change is stopping at a 2c increase in temperature by 2050 which means we get to produce 570 gigatons of CO2, so you can see the problem, there are 5 times more reserves than wriggle room. But reserves of fossil fuels is a lot less straight forward than the fossil industry would have you believe.

Saudi Arabia with the worlds largest reserve of crude oil had 261 billion barrels of crude in 1992 yet 18 years later had 264 Bb, this, despite extracting 60 billion barrels and not discovering any new fields in the same period. The same increases in estimates occurred throughout known oil fields. Another figure of interest is the amount of extra heavy and tar sands reserves in the global reserves which is 55% these are mainly in Venezuela and Canada. Canada has the 3rd largest reserves with Saudi 2nd and Venezuela in top position but Canadian oil is in a heavy form, it is oil sands which are close to the surface and are scooped up and processed. Oil wells do not tap down into great lakes of oil they are locked into porous rock with a capping strata of dense rock above. Drill through the capping over-lying rocks and the immense weight of [ 2 Km in the N.Sea] of rock above the oil bearing strata forces the oil out, the same is for gas. Conventional crude was an easy resource, it comes out of the ground under its own steam and with a 10% input of energy it is quickly converted into useful and cheap fuels, extra heavy and tar sands require a lot more energy to extract fuels. Canadian tar sands require 1 barrel of oil to process 3 barrels so in energy terms there is a quarter less reserves than reported. The other issue is the difference between what is a proven reserve and how much can be actually extracted which is nearer half, the Forties field in the North Sea reserves were proven at 5 billion barrels on discovery but less than 2 billion could ever be extracted.

Current global consumption is around 90 million barrels per day, to put that in perceptive one of the most recent discoveries: the Peregrino South oil field off the coast of Brazil is between 150-300 million barrels that’s just 2 or 3 days of demand. The Wikileaks documents revealed that countries may actual lie about reserves, Saudi production is huge but despite promising for a decade to supply 12 million barrels per day to help control prices that figure has not been met because there is not the oil. It is guessed that reserves may be between 40 & 50% less.

There are two ways to look at the problem, and either way it is a problem: there is plenty of oil for the next century but in burning it we will raise temperatures above 2c into the extremes of 4c and more meaning certain dangerous change for our grandchildren. How bad? Well it seems many scientists are more pessimistic than the consensual opinion. The other possibility is that there is a lot less oil. Oil reserves link into the whole financial market, as an instance BP is valued on potential production, when its shares are traded [and whose dividends pay pensions] the share is in future oil production- or rather extraction. Big up the companies reserves of oil and you big up the value of the shares. A recent example is UK shale gas reserves: Cuadrilla announced that it found a potential 200 trillion cubic feet of gas, this was, of course hype, as reserves and recoverable reserves in this case can be as little as 10-20% but the British Geological Society was a lot more reserved with a figure of 5 trillion cu/feet [150 billion cu/m]. The UK annual consumption is 100 billion cu/metres of gas which means fracking would provide 18 months of consumption.

The global energy market is estimated to be $6 trillion, so with the World economy being $60 trillion 10% of our production/consumption is energy. Most of that energy, which drives the power stations, the factories, the farms and our homes is derived from fossil fuels. Getting the value of the fossil fuel market as a percentage of the Global economy is difficult and I don’t know how realistic $6 tr is, a quick look at oil consumption = 32 billion barrels and its price at $100 per barrel gives $3.2 trillion and that is just wholesale oil, once processed the barrel [158 litres] of crude gives up valuable raw materials for the chemical and plastics industry as well as fuel . Some of that energy market is non fossil fuels, [burning wood being the main energy source in developing countries] but nonetheless our economy is dependant on fossil fuels and the markets use the ‘potential’ value of energy companies as secure investment. Not only is our lifestyle dependant on fossil fuels but also our livelihoods and future economic growth.

If the World’s governments were to take Climate Change seriously and committed to a 2c stabilisation this would restrict us to burn only 20% of fossil fuel reserves and would mean oil, gas and coal companies would lose 4/5ths of their value. The oil companies may be selling an elaborate Ponzi scheme and have significantly smaller reserves which may become apparent when demand from China and India out strips supply but that would be gradual, a Global declaration to avert climate disaster would happen overnight. It would strip value off the markets, trillions would be lost over night, and the global economy would be in crisis. The financial crisis was caused by the banks lying about their value of their assets, their Ponzi scheme of toxic mortgages simply valued property at a higher rate with people unlikely to pay it back. It cost the US economy $12 trillion but that excluded the $23 trillion in Quantitative Easing and bank bail outs, the $2.6 trillion in lost GDP and $trillions in share losses and unemployment.

The markets are not renowned for their foresight and it seems unlikely they are going to switch their investments from fossil fuels to green economies. The solutions are there, and the technology is proven. Even the costs are not an issue: the 1973 oil crisis, when prices quadrupled, made the North Sea Oil fields commercially viable with companies like BP investing and developing technologies that far outstripped the cost of Nasa putting a man on the Moon. Canada’s oil fields of tar sands are only viable because oil prices are so high and it is trend that can only go in one direction.

Investing in green energy on a huge scale is the only safe option given the alternatives are either ecological catastrophe or economic calamity, but with the markets dependency on fossil fuels the only alternative of funding rests with the individual and more importantly government.